Health care spending in retirement

Before you panic over what healthcare may cost in retirement, remember averages are very deceiving. It’s true that some retirees may incur very high expenses, mostly for long-term care and some for high cost prescriptions, but that is not typical.

As you may suspect those with a serious illness spend the most, primarily on prescription drugs. Only about 5% of Medicare beneficiaries live in a long-term care facility. The chart below illustrates Medicare out of pocket spending patterns.

Source: Kaiser Family Foundation

This chart shows reported OOP spending , but note it excludes the millions of beneficiaries with Medicare Advantage coverage who have virtually no OOP costs and includes those with Medicare but no supplemental coverage who will have higher OOP costs than the norm.

  • Average spending on prescription drugs was higher for beneficiaries with multiple chronic conditions and those in relatively poor self-reported health status. In 2016, traditional Medicare beneficiaries with five or more chronic conditions spent $1,065 on prescription drugs, on average, compared to $416 among those with one or two chronic conditions; those in poor self-reported health spent $1,018 on drugs compared to $410 among those in excellent self-reported health. In a separate analysis of the out-of-pocket cost burden for specialty drugs, we found that out-of-pocket drug costs for Part D enrollees taking medications for selected conditions, including cancer, hepatitis C, multiple sclerosis, and rheumatoid arthritis, can exceed thousands of dollars annually on a single medication.
  • In 2016, traditional Medicare beneficiaries spent an average of $449 out of pocket on dental services, which are typically not covered by Medicare.


For most retirees their primary ongoing expense will be premiums for supplemental and Part D coverage. Many Medicare beneficiaries can minimize their out-of-pocket expenses by enrolling in a Medicare Advantage Plan, provided they accept the use of network physicians and facilities.

The above total of $268.02 per month is $3,216.24 per year. The Medigap is Plan G which eliminates my out-of-pocket costs except for the Part B deductible. These rates are effective 1-1-21, are age-based. I’m 77 so younger retirees may pay less. IT IS THESE FIXED EXPENSES (plus your Medicare premiums) that can and should be planned for before retirement.

Premiums will vary by location. You may be able to buy similar plans for less in different parts of the Country.

THE POINT IS plan realistically for premiums and out of pocket costs in retirement and plan on an annual basis. Ignore those projections that a retiree will spend hundreds of thousands a year during all of retirement. Even if accurate, they are meaningless. What will you spend on food and property taxes during a retired lifetime?

Think about your options

FINALLY, plan ahead while working by accumulating tax-advantaged funds in Health Reimbursement Accounts (HRA) or Health Savings Accounts (HSA). These can be valuable tools to minimize the impact of future OOP costs.

One comment

  1. Dick, thanks for this post. Keep in mind that ~$6,000 / year is per person, so a couple age 65 needs ~$12,000 if they have a median or average level of spend. Note also that today’s median or average retiree does not incur significant long term care support services (LTSS) expenses. However, as life expectancy continues to increase for those Americans who do reach age 65 (different than life expectancy at birth), estimates are that in 20 to 30 years, 70+% of Americans will incur LTSS expenses.

    So, the rule of thumb, for your 401(k), IRA or HSA, was, is, continues to be, save all you can. Remember that assets in those plans/programs can (and should) be invested, and that all three of these accounts include survivor benefit provisions – if you are lucky enough and in good enough health to leave a legacy.

    Liked by 1 person

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